QUEST RESOURCE HOLDING CORP, 10-Q filed on 5/15/2014
Quarterly Report
Document and Entity Information
3 Months Ended
Mar. 31, 2014
May 1, 2014
Document And Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Mar. 31, 2014 
 
Document Fiscal Year Focus
2014 
 
Document Fiscal Period Focus
Q1 
 
Trading Symbol
QRHC 
 
Entity Registrant Name
Quest Resource Holding Corporation 
 
Entity Central Index Key
0001442236 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Smaller Reporting Company 
 
Entity Common Stock, Shares Outstanding
 
97,030,266 
CONSOLIDATED BALANCE SHEETS (USD $)
Mar. 31, 2014
Dec. 31, 2013
Current assets:
 
 
Cash and cash equivalents
$ 1,082,168 
$ 2,676,984 
Accounts receivable, less allowance for doubtful accounts of $360,938 and $319,735 as of March 31, 2014 and December 31, 2013, respectively
21,593,210 
20,849,140 
Inventory
7,584 
3,251 
Prepaid expenses and other assets
545,687 
401,537 
Total current assets
23,228,649 
23,930,912 
Property and equipment, net
582,617 
645,485 
Goodwill
58,337,290 
58,337,290 
Intangible assets, net
16,832,292 
17,636,964 
Security deposits and other assets
95,560 
95,892 
Total assets
99,076,408 
100,646,543 
Current liabilities:
 
 
Line of credit
4,750,000 
2,750,000 
Accounts payable
21,416,280 
23,589,755 
Accrued liabilities
2,042,833 
2,673,770 
Deferred revenue
342,913 
234,899 
Long-term debt and capital lease obligations-current portion
16,224 
16,096 
Convertible notes payable-short term
   
25,000 
Total current liabilities
28,568,250 
29,289,520 
Long-term capital lease obligations, less current maturities
28,987 
33,067 
Long-term senior secured convertible notes-related parties, net of discount $4,205,292 and $4,656,934 as of March 31, 2014 and December 31, 2013, respectively
17,794,708 
17,343,066 
Total liabilities
46,391,945 
46,665,653 
Commitments and Contingencies
   
   
Stockholders' equity:
 
 
Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued or outstanding as of March 31, 2014 and December 31, 2013, respectively
   
   
Common stock, $0.001 par value, 200,000,000 shares authorized, 95,837,766 and 95,814,565 shares issued and outstanding as of March 31, 2014 and December 31, 2013, respectively
95,838 
95,815 
Additional paid-in capital
119,602,750 
119,410,777 
Accumulated deficit
(67,014,125)
(65,525,702)
Total stockholders' equity
52,684,463 
53,980,890 
Total liabilities and stockholders' equity
$ 99,076,408 
$ 100,646,543 
CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
Mar. 31, 2014
Dec. 31, 2013
Statement Of Financial Position [Abstract]
 
 
Allowance for doubtful accounts receivable
$ 360,938 
$ 319,735 
Convertible notes payable - short term, discount
   
   
Long term senior secured convertible note - related party, discount
$ 4,205,292 
$ 4,656,934 
Preferred stock, par value
$ 0.001 
$ 0.001 
Preferred stock, shares authorized
10,000,000 
10,000,000 
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, par value
$ 0.001 
$ 0.001 
Common stock, shares authorized
200,000,000 
200,000,000 
Common stock, shares issued
95,837,766 
95,814,565 
Common stock, shares outstanding
95,837,766 
95,814,565 
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (USD $)
3 Months Ended
Mar. 31, 2014
Mar. 31, 2013
Income Statement [Abstract]
 
 
Revenue
$ 38,160,050 
$ 313,489 
Cost of revenue
34,827,635 
39,693 
Gross profit
3,332,415 
273,796 
Operating expenses:
 
 
Selling, general and administrative
2,993,708 
2,258,802 
Depreciation and amortization
951,663 
14,980 
Total operating expenses
3,945,371 
2,273,782 
Operating loss
(612,956)
(1,999,986)
Other expense:
 
 
Interest expense
(875,467)
(308,414)
Financing cost for senior secured convertible notes-related parties
   
(1,465,000)
Total other expense, net
(875,467)
(1,773,414)
Loss before taxes and equity income
(1,488,423)
(3,773,400)
Equity in Quest Resource Management Group, LLC income
   
475,796 
Loss before taxes
(1,488,423)
(3,297,604)
Income tax expense
   
   
Net loss
(1,488,423)
(3,297,604)
Net loss applicable to common stockholders
$ (1,488,423)
$ (3,297,604)
Net loss per share
 
 
Basic and diluted
$ (0.02)
$ (0.06)
Weighted average number of common shares outstanding
 
 
Basic and diluted
95,821,525 
57,961,106 
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) (USD $)
Total
Common Stock [Member]
Additional Paid-in Capital [Member]
Accumulated Deficit[Member]
Beginning Balance at Dec. 31, 2013
$ 53,980,890 
$ 95,815 
$ 119,410,777 
$ (65,525,702)
Beginning Balance, Shares at Dec. 31, 2013
 
95,814,565 
 
 
Stock-based compensation expense
162,995 
 
162,995 
 
Shares issued upon conversion of note
29,001 
23 
28,978 
 
Shares issued upon conversion of note, Shares
 
23,201 
 
 
Net loss
(1,488,423)
 
 
(1,488,423)
Ending Balance at Mar. 31, 2014
$ 52,684,463 
$ 95,838 
$ 119,602,750 
$ (67,014,125)
Ending Balance, Shares at Mar. 31, 2014
 
95,837,766 
 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (USD $)
3 Months Ended
Mar. 31, 2014
Mar. 31, 2013
Cash flows from operating activities:
 
 
Net loss
$ (1,488,423)
$ (3,297,604)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
Depreciation
69,567 
14,980 
Amortization of intangibles
882,096 
Amortization of debt discount and deferred financing costs
451,642 
259,690 
Equity in Quest Resource Management Group, LLC income
   
(475,796)
Provision (benefit) for doubtful accounts
41,338 
(436)
Stock-based compensation
162,995 
784,105 
Financing costs for senior convertible notes-related parties
   
1,465,000 
Changes in operating assets and liabilities:
 
 
Accounts receivable
(785,408)
59,600 
Inventory
(4,333)
1,383 
Prepaid expenses and other assets
(144,150)
(9,049)
Security deposits and other assets
332 
63,626 
Accounts payable
(2,173,475)
38,577 
Accrued liabilities
(626,936)
57,912 
Deferred revenue
108,014 
88,749 
Net cash used in operating activities
(3,506,741)
(949,263)
Cash flows from investing activities:
 
 
Purchase of property and equipment
(6,698)
(4,114)
Capitalized software development
(77,425)
 
Distributions received from Quest Resource Management Group, LLC
 
300,000 
Net cash (used in) provided by investing activities
(84,123)
295,886 
Cash flows from financing activities:
 
 
Proceeds from senior related party secured convertible note
 
500,000 
Proceeds from line of credit
2,000,000 
 
Repayments capital lease obligations
(3,952)
(18,226)
Net cash provided by financing activities
1,996,048 
481,774 
Net decrease in cash and cash equivalents
(1,594,816)
(171,603)
Cash and cash equivalents at beginning of period
2,676,984 
485,728 
Cash and cash equivalents at end of period
1,082,168 
314,125 
Supplemental cash flow information:
 
 
Cash paid for interest
423,826 
56,269 
Supplemental non-cash flow activities:
 
 
Common stock issued for services and loan fees
   
50,780 
Common stock issued for warrants-cashless exercise
   
21,698,338 
Discount to senior convertible note-related party
   
500,000 
Notes Payable [Member]
 
 
Supplemental non-cash flow activities:
 
 
Common stock issued for conversion of notes payable, including accrued interest
$ 29,001 
$ 61,461 
The Company and Description of Business and Future Liquidity Needs
The Company and Description of Business and Future Liquidity Needs

1. The Company and Description of Business and Future Liquidity Needs

The accompanying consolidated financial statements include the accounts of Quest Resource Holding Corporation (“QRHC”), formerly Infinity Resources Holdings Corp., and its subsidiaries, Earth911, Inc. (“Earth911”), Quest Resource Management Group, LLC (“Quest”), Landfill Diversion Innovations, LLC, and Youchange, Inc. (“YouChange”) (collectively, “QRHC”, the “Company”, “we”, “us”, or “our company”). On October 28, 2013, we changed our name to Quest Resource Holding Corporation, increased our shares of common stock authorized for issuance to 200,000,000, and changed our trading symbol to “QRHC.”

On July 16, 2013, we acquired the membership interests of Quest held by Quest Resource Group LLC (“QRG”), comprising 50% of Quest (the “Quest Interests”). Prior to July 16, 2013, our wholly owned subsidiary, Earth911, held the remaining 50% membership interest of Quest. Upon acquisition of the Quest Interests, we assigned the Quest Interests to Earth911 so that Earth911 now owns Quest and Quest is now our indirectly wholly owned subsidiary. We consolidated Quest in these financial statements for the quarter ended March 31, 2014.

Operations – We are an environmental solutions company that serves as a single-source provider of full service recycling and waste stream management solutions, as well as an environmental program services and information provider. We offer innovative, cost-effective, one-stop reuse, recycling, and waste disposal management programs designed to provide regional and national customers with a single point of contact for managing a variety of recyclables and disposables. We also own the Earth911.com website, offering original online environmental related content about reuse, recycling, and disposal of waste and recyclables, and we own a comprehensive online database of local recycling and proper disposal options. Our principal offices are located in Frisco, Texas.

Liquidity – During 2013, we restructured and relocated the operations of Earth911 and YouChange to reduce future operating expenses and streamline management. We expect the acquisition of the Quest Interests to provide increased cash flow from operations. In addition, we plan to increase working capital by increasing sales, maintaining efficient operating expenses, and through other initiatives.

Pro forma Three Months Ended March 31, 2013 Operating Results – As discussed above and in Note 10 to these financial statements, we previously accounted for Quest as an equity investment. On July 16, 2013, we acquired the remaining 50% membership interests of Quest and now hold 100% of the membership interests of Quest. The accompanying financial statements consolidate the results of operations of Quest for the quarter ended March 31, 2014.

The following table summarizes our pro forma consolidated operating results for the three months ended March 31, 2013, assuming Quest had been a wholly owned subsidiary and 100% of Quest’s operations were included in the relevant periods:

 

     Pro Forma
Three Months Ended March 31,
2013
 
     (Unaudited)  

Consolidated operating statement information:

  

Net sales

   $ 30,964,553   

Gross profit

     3,571,150   

Income (loss) from operations

     (924,938

Net income (loss)

     (2,821,808
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

Principals of Presentation, Consolidation, and Reclassifications

The consolidated financial statements included herein have been prepared by us without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited financial statements for the year ended December 31, 2013. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted, as permitted by the SEC, although we believe the disclosures that are made are adequate to make the information presented herein not misleading.

The accompanying consolidated financial statements reflect, in our opinion, all normal recurring adjustments necessary to present fairly our financial position at March 31, 2014, and the results of our operations and cash flows for the periods presented. We derived the December 31, 2013 consolidated balance sheet data from audited financial statements, but did not include all disclosures required by GAAP.

 

Through July 16, 2013, Quest was deemed to be a separate operating unit and as such, there were no intercompany transactions that required elimination at that time. All other intercompany accounts and transactions have been eliminated in consolidation, including transactions between QRHC and Quest subsequent to July 16, 2013. Certain reclassifications have been made to prior year balances to conform to the current year presentation. Interim results are subject to seasonal variations, and the results of operations for the three months ended March 31, 2014 are not necessarily indicative of the results to be expected for the full year.

As Quest, Earth911, and YouChange are operating as ecology based green service companies, we did not deem segment reporting necessary.

Accounting Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could materially differ from those estimates.

We use significant estimates when accounting for the collectability of accounts receivable, depreciable lives of fixed assets, accruals, assumptions used in the valuation and recognition of share-based payments and warrant liability, the realization of goodwill and intangible assets, deferred tax assets, the equity method investment in Quest, and the application of accounting for the senior secured convertible notes, all of which are discussed in their respective notes to the consolidated financial statements.

Revenue Recognition

We recognize revenue only when all of the following criteria have been met:

 

    persuasive evidence of an arrangement exists;

 

    delivery has occurred or services have been rendered;

 

    the fee for the arrangement is fixed or determinable; and

 

    collectability is reasonably assured.

Persuasive Evidence of an Arrangement – We document all terms of an arrangement in a quote signed or confirmed by the customer prior to recognizing revenue.

Delivery Has Occurred or Services Have Been Performed – We perform all services or deliver all products prior to recognizing revenue. Services are deemed to be performed when the services are complete.

The Fee for the Arrangement is Fixed or Determinable – Prior to recognizing revenue, a customer’s fee is either fixed or determinable under the terms of the quote or accepted customer purchase order.

Collectability Is Reasonably Assured – We assess collectability on a customer by customer basis based on criteria outlined by management.

Quest provides businesses with management programs to reuse, recycle, and dispose of a wide variety of waste streams and recyclables generated by their business. Quest utilizes third-party subcontractors to execute the collection, transport, and recycling or disposal of used motor oil, oil filters, scrap tires, cooking oil, and expired food products. We evaluate the criteria outlined in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 605-45, Revenue Recognition—Principal Agent Considerations, in determining whether it is appropriate to record the gross amount of service revenue and related costs or the net amount earned as management fees. Generally, when we are primarily obligated in a transaction, have latitude in establishing prices and selecting suppliers, have credit risk, or have several but not all of these indicators, we record revenue gross and record amounts collected from customers for sales tax on a net basis. In a situation where we are not primarily obligated and amounts earned are determined using a fixed percentage, a fixed-payment schedule, or a combination of the two, we would record the net amounts as management fees earned. Currently, we have no contracts accounted for as management fees.

 

Earth911 revenue primarily represents licensing fees that are recognized ratably over the term of the license. We derive some revenue from advertising contracts, which we recognize ratably, over the term that the advertisement appears on our website.

Cash and Cash Equivalents

We consider all highly liquid instruments with a remaining maturity of three months or less when purchased to be cash equivalents.

Fair Value Measurements

ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820 also specifies a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value as follows:

Level 1: Quoted prices in active markets for identical assets or liabilities;

Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

Level 3: Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our own estimate of assumptions that market participants would use in pricing the asset or liability.

Fair value accounting has been applied to the valuation of stock-based compensation, warrants issued, intangible assets, and goodwill.

Stock Options We estimate the fair value of stock options on the grant date in accordance with ASC Topic 718 using the Black-Scholes-Merton valuation model. Significant Level 3 assumptions used in the calculation are as follows:

 

    We determine the expected term using the simplified method for plain vanilla options by averaging the contractual term and vesting period of the award due to the unavailability of appropriate statistical data required to properly estimate the expected term in accordance with SEC Staff Accounting Bulletin No. 107;

 

    We measure expected volatility using the historical changes in the market price of our common stock, disregarding identifiable periods of extraordinarily volatile share prices due to certain events that are not expected to recur during the expected term;

 

    We use the risk-free interest rate to approximate the implied yield on zero-coupon U.S. Treasury bonds with a remaining maturity equal to the expected term of the awards; and

 

    We base forfeitures on the history of cancellations of options granted by us and our analysis of potential future forfeitures.

Net Loss Per Share

We compute basic net loss per share by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. The calculation of basic loss per share gives retroactive effect to the recapitalization related to our reverse acquisition of Earth911. We have other potentially anti-dilutive securities outstanding that are not shown in a diluted net loss per share calculation because their effect in both 2014 and 2013 would be dilutive. These potentially dilutive securities include options, warrants, and convertible promissory notes totaled 15,096,948 and 11,782,240 shares at March 31, 2014 and 2013, respectively.

 

The following table sets forth the computation of basic and diluted loss per share:

 

     For the Three Months Ended March 31,  
     2014     2013  
     (Unaudited)     (Unaudited)  

Net loss applicable to common stockholders—numerator for basic and diluted earnings per share

   $ (1,488,423   $ (3,297,604
  

 

 

   

 

 

 

Weighted—average common shares outstanding—denominator for basic and diluted earnings per share

     95,821,525        57,961,106   

Net loss per share:

    
  

 

 

   

 

 

 

Basic and diluted

   $ (0.02   $ (0.06
  

 

 

   

 

 

 

The following table sets forth the anti-dilutive securities excluded from diluted loss per share:

 

     As of March 31,  
     2014      2013  
     (Unaudited)      (Unaudited)  

Anti-dilutive securities excluded from diluted loss per share:

     

Stock options

     4,096,948         3,432,115   

Warrants

     —          1,381,113   

Convertible notes

     11,000,000         6,969,012   
  

 

 

    

 

 

 
     15,096,948         11,782,240   
  

 

 

    

 

 

 

Investment in Quest

Investee companies that are not consolidated, but over which we exercise significant influence, are accounted for under the equity method of accounting. Whether or not we exercise significant influence with respect to an investee depends on an evaluation of several factors, including, among others, representation on the investee company’s board of directors and ownership level, which is generally a 20% to 50% interest in the voting securities of the investee company. Prior to July 17, 2013, we accounted for the investment in Quest under the equity method of accounting, in which the investee company’s accounts were not consolidated within our consolidated balance sheet and statement of operations. We reflect our share of earnings or losses of the investee company in the caption “Equity in Quest Resource Management Group, LLC income” in our consolidated statement of operations. Subsequent to our acquisition of the Quest Interests, we consolidate the operational activity of Quest with QRHC.

Income Taxes

We recognize deferred tax assets and liabilities for the future tax consequences of temporary differences between the book and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. We establish valuation allowances to reduce a deferred tax asset to the amount expected to be realized. We assess our ability to realize deferred tax assets based on current earnings performance and on projections of future taxable income in the relevant tax jurisdictions. These projections do not include taxable income from the reversal of deferred tax liabilities and do not reflect a general growth assumption but do consider known or pending events, such as the passage of legislation. We review our estimates of future taxable income annually. We first analyze all tax positions to determine if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of any related appeals or litigation processes. After the initial analysis, we measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. Our income tax returns are subject to adjustment under audit for approximately the last three years.

If we are required to pay interest on the underpayment of income taxes, we recognize interest expense in the first period the interest becomes due according to the provisions of the relevant tax law.

If we are subject to payment of penalties, we recognize an expense for the amount of the statutory penalty in the period when we take the position on the income tax return. If we did not recognize the penalty in the period when we initially took the position, we recognize the expense in the period when we change our judgment about meeting minimum statutory thresholds related to the initial position taken.

 

Stock-Based Compensation

We expense all share-based grants to employees, including grants of employee stock options, based on their estimated fair values at grant date, in accordance with ASC Topic 718. We record compensation expense for stock options over the vesting period using the estimated fair value on the date of grant, as calculated using the Black-Scholes-Merton model. We classify all share-based awards as equity instruments and recognize the vesting of the awards ratably over their respective terms. See Note 13 for a description of our share-based compensation plan and information related to awards granted under the plan.

Inventories
Inventories

3. Inventories

As of March 31, 2014 and December 31, 2013, finished goods inventories were $7,584 and $3,251, respectively, and consisted of composite heaters, with no reserve for inventory obsolescence at either date.

Property and Equipment
Property and Equipment

4. Property and Equipment

At March 31, 2014 and December 31, 2013, property and equipment consisted of the following:

 

     March 31,     December 31,  
     2014     2013  
     (Unaudited)        

Vehicles

   $ 544,984      $ 544,984   

Computer equipment

     796,419        790,987   

Office furniture and fixtures

     240,929        239,662   

Machinery and equipment

     458,257        458,257   

Leasehold improvements

     12,363        12,363   
  

 

 

   

 

 

 
     2,052,952        2,046,253   

Less: accumulated depreciation

     (1,470,335     (1,400,768
  

 

 

   

 

 

 
   $ 582,617      $ 645,485   
  

 

 

   

 

 

 

We lease certain computer equipment under agreements that are classified as capital leases. The cost of equipment under these capital leases was $50,470 and $49,163 at March 31, 2014 and December 31, 2013, respectively, and we record it in the consolidated financial statements as property and equipment. Accumulated depreciation of the leased equipment at March 31, 2014 and December 31, 2013 was $3,365, and $1,402, respectively.

Intangible Assets
Intangible Assets

5. Intangible Assets

The components of intangible assets are as follows:

 

March 31, 2014    Estimated
Useful Life
     Gross Carrying
Amount
     Accumulated
Amortization
     Net  

Finite lived intangible assets:

           

Customer relationships

     5 years       $ 12,720,000       $ 1,802,000       $ 10,918,000   

Trademarks

     7 years         6,230,000         630,417         5,599,583   

Patents

     7 years         230,683         225,191         5,492   

Software

     7 years         77,425         —          77,425   

Customer lists

     5 years         307,153         75,361         231,792   
     

 

 

    

 

 

    

 

 

 

Total intangible assets

      $ 19,565,261       $ 2,732,969       $ 16,832,292   
     

 

 

    

 

 

    

 

 

 

Goodwill

     Indefinite       $ 58,337,290          $ 58,337,290   

We compute amortization using the straight-line method over the estimated useful lives of the assets. The amortization expense related to intangible assets was $882,096 for the quarter ended March 31, 2014, with no comparable expense for the quarter ended March 31, 2013. We have no indefinite-lived intangible assets other than goodwill. The goodwill is not deductible for tax purposes.

Accrued Expenses and Other Current Liabilities
Accrued Expenses and Other Current Liabilities

6. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:

 

     March 31,      December 31,  
     2014      2013  
     (Unaudited)         

Compensation

   $ 796,663       $ 1,114,252   

Deferred rent obligation

     835,804         930,274   

Sales and use tax

     183,801         484,134   

Professional fees

     144,826         40,241   

Insurance

     —           48,663   

Accrued interest and other

     81,739         56,206   
  

 

 

    

 

 

 
   $ 2,042,833       $ 2,673,770   
  

 

 

    

 

 

 
Line of Credit
Line of Credit

7. Line of Credit

On December 15, 2010, Quest entered into a Revolving Credit Note and Loan Agreement with Regions Bank (“Regions”), a national banking association. This agreement provides Quest with a loan facility up to $10,000,000 for working capital with advances generally limited to 60% of eligible accounts receivable from Quest’s largest customer and 85% of all other eligible accounts receivable. The interest on the outstanding principal amount accrues daily and is payable monthly based on a fluctuating interest rate per annum, which is the base rate plus 1.50% (4.75% as of March 31, 2014). The base rate for any day is the greater of (a) the Federal funds rate plus one-half of 1%, (b) Region’s published effective prime rate, or (c) the Eurodollar rate for such day based on an interest period of one month. To secure the amounts due under the agreement, Quest granted Regions a security interest in all of its assets. Quest had $4,750,000 outstanding and approximately $5,250,000 available to be borrowed as of March 31, 2014. On May 9, 2014, Quest and Regions had made amendments to the loan to extend the term to May 31, 2015. See Note 15 — Subsequent Events.

Convertible Note Payable
Convertible Note Payable

8. Convertible Note Payable

During the quarter ended March 31, 2014, $25,000 of principal and $4,001 of interest was converted into 23,201 shares of our common stock. We treat the intrinsic value of a beneficial conversion feature inherent to a convertible note payable, which we do not bifurcate, separately from the convertible note payable, and we may not settle in cash upon conversion, as a discount to the convertible note payable. We amortize this discount over the period from the date of issuance to the date the note is due using the effective interest method. If we retire the note payable prior to the end of its contractual term, we expense the unamortized discount in the period of retirement to interest expense. In general, we measure the beneficial conversion feature by comparing the effective conversion price, after considering the relative fair value of detachable instruments included in the financing transaction, if any, to the fair value of the common shares at the commitment date to be received upon conversion.

The following convertible note payable was outstanding as of March 31, 2014 and December 31, 2013:

 

     March 31,      December 31,  
     2014      2013  
     (Unaudited)         

Convertible note payable to unrelated parties, issuance date of September 2012

     —        $ 25,000   
  

 

 

    

 

 

 

Total convertible notes payable - short term

     —        $ 25,000   
  

 

 

    

 

 

 

During September 2012, we issued for cash a $25,000 convertible note to an unrelated, accredited third party. The note matured six months from the date of issuance but could be extended for an additional 30 days at our discretion. The note bore interest at a rate of 10.0% per annum and was convertible at any time, with accrued interest, at the discretion of the investor into shares of our common stock at a rate of $1.25 per share. Based on our share price at the time we entered into the note agreement, we recognized a beneficial conversion feature of $17,500 for this convertible note.

Long-Term Debt and Capital Lease Obligations
Long-Term Debt and Capital Lease Obligations

9. Long-Term Debt and Capital Lease Obligations

At March 31, 2014 and December 31, 2013, total long-term debt outstanding consisted of the following:

 

     March 31,     December 31,  
     2014     2013  
     (Unaudited)        

Secured convertible notes payable to related parties, 7% interest due monthly in arrears, due July 2016, repayment provisions discussed further below (Net of discount of $4,205,292 and $4,656,934 as of March 31, 2014 and December 31, 2013, respectively)

   $ 17,794,708      $ 17,343,066  

Capital lease obligations, imputed interest at 4.75%, with monthly payments of $1,507 through November 2016, secured by computer equipment

     45,211        49,163   
  

 

 

   

 

 

 

Total

     17,839,919        17,392,229   

Less: current maturities

     (16,224     (16,096
  

 

 

   

 

 

 

Long-term portion

   $ 17,823,695      $ 17,376,133   
  

 

 

   

 

 

 

Convertible Secured Promissory Notes – Quest Acquisition – In connection with our acquisition of Quest on July 16, 2013, we issued convertible secured promissory notes with a total principal amount of $22,000,000 to the owners of QRG: the Chief Executive Officer of Quest and former President of Quest, who are also related parties of our company. The convertible secured promissory notes (collectively, the “Sellers Notes”) are each secured by a first-priority security interest in a 25% membership interest held by Earth911 in Quest (comprising a total of 50% of the membership interests of Quest), as set forth in security and membership interest pledge agreements, by and between Earth911 and the sellers. The Sellers Notes accrue interest at a rate of 7% per annum and are payable on a monthly basis on the 5th day of the month beginning on September 5, 2013. The principal amount will be due and payable in one installment on July 16, 2016.

The Sellers Notes are convertible at any time, in the sole discretion of the holders, into shares of our common stock at a price of $2.00 per share. In addition, the Sellers Notes are convertible, in our sole discretion, into shares of our common stock at a price of $2.00 per share at any time (i) after the two year anniversary of the Notes, (ii) the principal amount of each Sellers Notes has been paid down by $5,000,000 as a result of the first capital raise, (iii) our common stock trades on the Nasdaq Stock Market, the New York Stock Exchange, or NYSE MKT, and (iv) our common stock has traded at four times the $2.00 conversion price, as adjusted for any stock splits, reverse stock splits, or both. If the holders converted the Seller’s Notes as of March 31, 2014, the value of the shares upon conversion would have exceeded the note original principal balance by $1.3 million. Based on our share price at the time we entered into the Sellers Notes agreement, we recognized a beneficial conversion feature of $5,500,000 and discounted the Sellers Notes. As of March 31, 2014, the unamortized discount on the Sellers Notes was $4,205,292. The amount of interest expense related to the Sellers Notes for the quarter ended March 31, 2014 was $379,726. The amount of interest expense related to the amortization of the discount on the Sellers Notes for the quarter ended March 31, 2014 was $451,642.

Stockbridge Senior Secured Convertible Note – On March 22, 2012, Earth911 entered into a securities purchase agreement with Stockbridge Enterprises, L.P., a related party (“Stockbridge”), pursuant to which Earth911 issued a senior secured convertible note (the “Convertible Note”) and four warrants to Stockbridge. All of the assets of Earth911 secured the Convertible Note. On each of October 10, 2012 and March 29, 2013, the terms of the note and the warrants were amended and additional warrants were issued to Stockbridge (the “Allonge” and the “Second Allonge”). The Convertible Note and warrants were also adjusted for the Earth911 Merger in October 2012. On July 16, 2013, Stockbridge elected to convert $3,000,000 in principal and $34,500 of accrued interest into 8,382,597 shares of our common stock.

The amended Convertible Note provided for up to $3,000,000 principal with a maturity date of October 1, 2015, which was extendable under certain circumstances. As of June 30, 2013, the full amount of the principal had been drawn. The annual interest rate was adjusted in October 2012 to 9.0% from the original 6.0%, and was due monthly in arrears. Reflecting the adjustment for the Earth911 Merger, the Convertible Note was convertible into shares of our common stock at $0.362 per share prior to the maturity date, subject to a downward formula-based adjustment for future issuances of common stock or stock equivalents under certain conditions whereby the issue price was lower than the conversion price in effect immediately prior to such issue or sale (the “Fixed Conversion Price”). As a result of the Earth911 Merger, a United States exchange lists our common stock (a “Triggering Event”); therefore the conversion price was the lower of the Fixed Conversion Price or the average closing bid price during the ten trading days immediately preceding the conversion date.

 

In connection with the Convertible Note, we issued five-year warrants that were subsequently adjusted for the Earth911 Merger and consisted of the following:

 

  (i) a warrant issued March 2012 to acquire up to 1,381,115 shares of our common stock, exercisable immediately upon execution of the Convertible Note (“Warrant 1-1”);

 

  (ii) three contingent warrants issued March 2012, exercisable only in the event that all outstanding principal and accrued interest on the Convertible Note was not paid in full at such dates, as follows: a warrant to acquire up to 345,278 shares of our common stock, exercisable at the conclusion of 42 months after the issuance date of the warrant (“Warrant 1-2”); a warrant to acquire up to 345,278 shares of our common stock, exercisable at the conclusion of 45 months after the issuance date of the warrant (“Warrant 1-3”); and a warrant to acquire up to 690,557 shares of our common stock, exercisable at the conclusion of 48 months after the issuance date of the warrant (“Warrant 1-4”);

 

  (iii) a warrant issued October 2012 upon execution of the Allonge to acquire up to 5,524,461 shares of our common stock, exercisable immediately (“Warrant 1-5”); and

 

  (iv) a warrant issued March 2013 upon execution of the Second Allonge to acquire up to 500,000 shares of our common stock, exercisable immediately (“Warrant 1-6”).

Warrant 1-1 was exercisable at the lower of $0.37 per share or the average closing bid price during the ten trading days immediately preceding the exercise date. Warrant 1-5 was exercisable at the lower of $0.37 per share or the average closing bid price during the ten trading days immediately preceding the exercise date. Warrant 1-6 was exercisable at the lower of $0.37 per share or the average closing bid price during the ten trading days immediately preceding the exercise date.

Warrant 1-1, Warrant 1-5, and Warrant 1-6 were exercised in March 2013 as part of the Second Allonge using a cashless exercise formula.

If the contingent Warrant 1-2, Warrant 1-3, and Warrant 1-4 had become exercisable, the exercise price would have been the lower of $0.37 per share or the average closing bid price during the ten trading days immediately preceding the exercise date. The exercise price for all of the warrants was also subject to a downward formula-based adjustment for future issuances of common stock or stock equivalents under certain conditions whereby the issue price is lower than the exercise price in effect immediately prior to such issue or sale. These warrants were cancelled when the Convertible Note was converted on July 16, 2013.

In connection with the issuance of the Convertible Note, Warrant 1-1 and Warrant 1-5 were initially valued and accounted for as a warrant liability of $18,742,526 and allocated as a discount to the Convertible Note of $1,500,000 with the remainder of $17,242,526 expensed as a financing cost. See Note 12 regarding the valuations of the warrant liability.

On March 29, 2013, Stockbridge elected to exercise Warrant 1-1, Warrant 1-5, and Warrant 1-6 with exercisable rights in total to purchase 7,405,576 shares of our common stock at $0.37 per share under the cashless exercise option of the Second Allonge. The Company determined the net number of shares to issue using the “Cashless Exercise” formula, as amended and restated, as follows:

Net Number of Shares to Issue = (A x B) – (A x C)

D

For purposes of the foregoing formula as of March 29, 2013:

A = 7,406,576, the total number of warrant shares with respect to which these warrants were then being exercised.

B = $3.30, the closing price of our common stock plus 10.0% on the date of exercise of the warrant.

C = $0.37, the warrant exercise price then in effect for the applicable warrant shares at the time of such exercise.

D = $3.00, the closing price of our common stock on the date of exercise of the warrant.

Based on the cashless exercise formula, on March 29, 2013, Warrant 1-1, Warrant 1-5, and Warrant 1-6 yielded a net number of shares to issue of 7,232,779 with a value of $21,698,338 based on the $3.00 closing price of the stock on the date of issue.

Investment in Quest Resource Management Group, LLC
Investment in Quest Resource Management Group, LLC

10. Investment in Quest Resource Management Group, LLC

Prior to July 16, 2013, we held a 50% ownership interest in Quest, which Earth911 acquired on August 21, 2008. On July 16, 2013, we acquired all of the Quest Interests, held by QRG, comprising 50% of the membership interests of Quest. The purchase price for the Quest Interests consisted of 22,000,000 shares of our common stock issued at a fair market value of $2.50 per share based on the closing price of the stock on the date of the transaction and the Sellers Notes in the aggregate principal amount of $22,000,000. We paid the total purchase price of $77,000,000 to the owners of QRG and related parties: the Chief Executive Officer of Quest and the President of Quest. After the close of the transaction, the Chief Executive Officer of Quest became the President, Chief Executive Officer, and member of the Board of Directors of our Company. Subsequent to our purchase of the Quest Interests on July 16, 2013, we consolidated 100% of the operating activity of Quest into the operations of our company and reflected the adjustments for the ownership purchase and valuation of goodwill.

Concurrently with our acquisition of the Quest Interests, we assigned the Quest Interests to Earth911, our wholly owned subsidiary, which now holds 100% of Quest. We accounted for the acquisition of Quest under ASC Topic 805; thereby the acquisition accounting for the acquired Quest Interests and the step up basis of the previously owned 50% interest resulted in the following total purchase price for Quest as follows:

 

Consideration paid for Quest Interest

   $ 77,000,000   

Non-controlling interest in the acquiree at the acquisition date fair value

     27,050,000   
  

 

 

 

Total consideration

   $ 104,050,000   
  

 

 

 

We primarily employed two methodologies that yielded substantially the same results to determine the fair value of our preexisting equity interest in Quest, which we re-measured as a non-controlling interest independent of the acquired controlling interest as of the effective date of the acquisition: (i) the amount at which the asset could be bought or sold in a current transaction between willing parties; and (ii) the present value of expected future cash flows of Quest, level 2 and level 3 inputs, respectively.

The purchase price allocation as of July 16, 2013 for the assets, liabilities, intangibles, and goodwill totaling $104,050,000 was as follows:

 

Net assets and liabilities

   $ 1,214,804   

Customer relationships

     12,720,000   

Trademarks

     6,230,000   

Goodwill

     83,885,196   
  

 

 

 
   $ 104,050,000   
  

 

 

 

In connection with the fair value adjustment to the Investment in Quest due to the acquisition, we recorded in 2013 a gain on investment in Quest of $23,449,372, the difference between the fair value and the carrying amount of the asset on the date of the acquisition. In addition, we recognized $26,850,039 of goodwill impairment based on our goodwill impairment testing. We determined that the carrying amount of the reporting unit exceeded the fair value and recorded a goodwill impairment charge. The impact of the goodwill impairment and the gain on investment was a net expense of $3,400,667 included in the operating loss for the year ended December 31, 2013.

 

The financial condition and operating results of Quest for the relevant periods are presented below:

 

 

     Three Months ended March 31,  
     2014     2013  
     (Unaudited)     (Unaudited)  

Condensed operating statement information:

    

Net sales

   $ 37,972,639      $ 30,651,064   

Gross profit

     3,145,004        3,297,354   

Income from operations

     21,583        1,075,048   

Net income (loss)

     (22,065     951,592   
Income Taxes
Income Taxes

11. Income Taxes

Income taxes are computed using the asset and liability method in accordance with ASC Topic 740. Under the asset and liability method, we determine deferred income tax assets and liabilities based on the differences between the financial reporting and tax bases of assets and liabilities and measure them using currently enacted tax rates and laws. We provide a valuation allowance for the amount of deferred tax assets that, based on available evidence, are not expected to be realized. In our opinion, realization of our net operating loss carry forward is not reasonably assured as of March 31, 2014 and December 31, 2013, and we have recorded a valuation allowance of $6,991,000 and $6,582,000 respectively, against deferred tax assets in excess of deferred tax liabilities in the accompanying consolidated financial statements.

The components of net deferred taxes are as follows:

 

     March 31,
2014
    December 31,
2013
 
     (Unaudited)        

Deferred tax assets (liabilities):

    

Net operating loss

   $ 4,469,000      $ 4,212,000   

Stock-based compensation

     2,168,000        2,103,000   

Accrued interest expense

     202,000        150,000   

Allowance for doubtful accounts

     64,000        47,000   

Deferred lease liability

     88,000        70,000   
  

 

 

   

 

 

 

Total deferred tax assets

     6,991,000        6,582,000   

Less: valuation allowance

     (6,991,000     (6,582,000
  

 

 

   

 

 

 

Net deferred taxes

   $ —       $ —    
  

 

 

   

 

 

 

 

The reconciliation between the income tax expense (benefit) calculated by applying statutory rates to net loss and the income tax benefit reported in the accompanying consolidated financial statements is as follows:

 

     March 31,     December 31,  
     2014     2013  
     (Unaudited)        

U.S. federal statutory rate applied to pretax income

   $ (506,064   $ (6,051,780

Permanent differences

     153,558        2,739,048   

State taxes and other

     (56,494     1,597,415   

Change in valuation allowance

     409,000        1,715,317   
  

 

 

   

 

 

 
   $ —       $ —    
  

 

 

   

 

 

 

As of December 31, 2013, we had federal income tax net operating loss carry forwards of approximately $4,212,000, which expire at various dates beginning in 2031. We are subject to limitations existing under Internal Revenue Code Section 382 (Change of Control) relating to the availability of the operating loss.

As of December 31, 2013, we did not recognize any assets or liabilities relative to uncertain tax positions, nor do we anticipate any significant unrecognized tax benefits will be recorded during 2014. We classify interest and penalties on income taxes as interest expense or penalties expense.

Tax positions are positions taken in a previously filed tax return or positions expected to be taken in a future tax return that are reflected in measuring current or deferred income tax assets and liabilities reported in the financial statements. Tax positions include the following:

 

    an allocation or shift of income between taxing jurisdictions;

 

    the characterization of income or a decision to exclude reportable taxable income in a tax return; or

 

    a decision to classify a transaction, entity, or other position in a tax return as tax exempt.

We are potentially subject to tax audits for federal and state tax returns for tax years ended 2013 to 2011. Tax audits by their very nature are often complex and can require several years to complete. Prior to July 13, 2010, as a limited liability company, we were not a tax paying entity for federal and state income tax purposes. Accordingly, we allocated our taxable income or loss to our members in accordance with their respective percentage ownership.

Fair Value of Financial Instruments
Fair Value of Financial Instruments

12. Fair Value of Financial Instruments

Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, convertible notes payable, notes payable, and warrant liability. We do not believe that we are exposed to significant interest, currency, or credit risks arising from these financial instruments. With the exception of the warrant liability, the fair values of these financial instruments approximates their carrying values using Level 3 inputs, based on their short maturities or, for long-term debt based on borrowing rates currently available to us for loans with similar terms and maturities. Gains and losses recognized on changes in fair value of convertible notes and warrant liability are reported in other income (expense).

We measured our initial warrant valuation at fair value by applying the Black-Scholes-Merton option valuation model, which utilizes Level 3 inputs. The assumptions used in the Black-Scholes-Merton option valuation for the warrants are as follows: volatility of 66%; risk free interest rate of 1%; expected term of 5 years; and expected dividend yield of 0%. The grant date fair value of the initial warrant valuation described above was $2.56 per warrant. We base the risk free interest rate on United States Treasury rates with maturity dates approximating the expected term of the warrants. At the time of the initial warrant valuation, we were a private company and common stock transactions were too infrequent, therefore we could not practicably estimate the expected volatility of our own stock. Accordingly, we have substituted the historical volatility of a relevant sector index, which we have generated from companies that are publicly traded and do business within the industry we operate.

We measured the March 29, 2013 fair value by utilizing the quoted market price for our common stock and the valuation for the cashless exercise of Warrant 1-1, Warrant 1-5, and Warrant 1-6 in March 2013, which are Level 1 and Level 2 inputs. These inputs of (i) an observable warrant exercise transaction and (ii) publicly traded market price provided a reasonable basis for valuation for the warrants as of March 29, 2013. Based on that valuation using the $3.00 closing market price and exercisable rights in total to purchase 6,905,576 shares of our common stock at $0.37 per share, Warrant 1-1 and Warrant 1-5 had a net number value of $20,233,338. Using the same valuation method, Warrant 1-6 had a net number value of $1,465,000 upon issuance on March 29, 2013. All three warrants were exercised on March 29, 2013. See Note 9 for further discussion regarding the cashless exercise of these warrants.

Stockholders' Equity
Stockholders' Equity

13. Stockholders’ Equity

Preferred Stock Our authorized preferred stock consists of 10,000,000 shares of preferred stock with a par value of $0.001, of which no shares have been issued or are outstanding.

Common Stock Our authorized common stock consists of 200,000,000 shares of common stock with a par value of $0.001 with 95,837,766 shares and 95,814,565 shares issued and outstanding as of March 31, 2014 and December 31, 2013, respectively.

During the three months ended March 31, 2014, we issued shares of common stock as follows:

 

     Common Stock         
     Shares      Amount  

Note and interest conversions

     23,201       $ 29,001   
  

 

 

    

 

 

 
     23,201       $ 29,001   
  

 

 

    

 

 

 

Common Stock for Services – We issued none and 17,226 shares of common stock to employees and consultants for nil and $50,780 of services during the three months ended March 31, 2014 and 2013, respectively.

Stock Option Plan In October 2012, we adopted our 2012 Incentive Compensation Plan, which was subsequently amended in September 2013 (the “2012 Plan”). The 2012 Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, bonus stock, dividend equivalents, other stock-based awards, and performance awards that may be settled in cash, stock, or other property to our officers, directors, employees, and consultants who are natural persons providing bona fide services to us or our subsidiaries and other designated affiliates, which we refer to as “Related Entities.” The purpose of the 2012 Plan is to assist us and our Related Entities in attracting, motivating, retaining, and rewarding high-quality executives and other employees, officers, directors, and individual consultants who provide services to us or our Related Entities, by enabling such persons to acquire or increase a proprietary interest in our company in order to strengthen the mutuality of interests between such persons and our stockholders, and providing such persons with performance incentives to expend their maximum efforts in the creation of stockholder value. The 2012 Plan is administered by the compensation committee of our Board of Directors or a subcommittee thereof formed by the compensation committee, except to the extent our Board of Directors elects to administer the 2012 Plan (subject to limitations described in the 2012 Plan. Our policy is to fulfill any exercise of options from common stock that is authorized and unissued. The maximum number of shares of common stock available for grant under the plan is 7,500,000. Stock compensation expense prior to October 2012 is related to options granted prior to the Earth911 Merger that the 2012 Plan superseded at the time of the Earth911 Merger. The number of shares available for award under the plan is subject to adjustment for certain corporate changes in accordance with the provisions of the plan. Stock-based compensation expense was $162,995 and $784,105 for the three months ended March 31, 2014 and 2013, respectively.

Following is a summary of stock option activity subsequent to December 31, 2013 through March 31, 2014:

 

 

     Stock Options  
                  Weighted-  
           Exercise      Average  
     Number     Price Per      Exercise Price  
     of Shares     Share      Per Share  

Outstanding at December 31, 2013

     4,141,948      $ 2.00 - 3.25       $ 2.48   

Granted

     —          —          —    

Canceled/Forfeited

     (45,000   $ 2.05 - 2.05       $ 2.05   
  

 

 

      

Outstanding at March 31, 2014

     4,096,948      $ 2.00 - 3.25       $ 2.48   
  

 

 

      

As of March 31, 2014, the intrinsic value of options outstanding was $122,192 and the intrinsic value of options exercisable was $66,367.

 

The following additional information applies to options outstanding at March 31, 2014:

 

          Weighted-                    
          Average     Weighted-           Weighted-  
Ranges of   Outstanding at     Remaining     Average     Exercisable at     Average  
Exercise   March 31,     Contractual     Exercise     March 31,     Exercise  

Prices

  2014     Life     Price     2014     Price  
$2.00 - $3.25     4,096,948        8.2      $ 2.48        3,199,448      $ 2.63   

At March 31, 2014, the balance of unearned stock-based compensation to be expensed in future periods related to unvested share-based awards, as adjusted for expected forfeitures, was approximately $988,699.

Related Party Transactions
Related Party Transactions

14. Related Party Transactions

Stockbridge Convertible Note – In March 2012, we issued the Convertible Note to Stockbridge, a related party. In connection with the issuance of the Convertible Note, we issued four warrants (Warrants1-1 through 1-4) in March 2012. On July 16, 2013, Stockbridge elected to convert $3,000,000 in principal and $34,500 of accrued interest of the Convertible Note into 8,382,597 shares of our common stock. With the conversion, the contingent Warrants 1-2, 1-3, and 1-4 were cancelled.

Allonge to the Convertible Note – In October 2012, we amended the Convertible Note. We increased the original principal amount to $3,000,000 from the original $1,000,000 amount. We changed the maturity of the note to October 1, 2014. We changed the conversion rate of the Convertible Note to $.50 per common share prior to the maturity date and $.25 per common share after the maturity, subject to certain adjustments. In connection with the amendment, we issued Warrant 1-5 in October 2012 and issued 100,000 shares of our common stock.

Second Allonge to the Convertible Note On March 29, 2013, the terms of the note and the warrants were amended and additional warrants were issued to Stockbridge. Under the amendment on March 29, 2013, Earth911 and Stockbridge entered into the Second Allonge, pursuant to which the parties agreed to (i) change all references to common stock, options, warrants, warrant shares, or

convertible securities of Earth911 in the original note documents and the Allonge documents to our common stock, options, warrants, warrant shares, or convertible securities, respectively, and (ii) expand all references to a “Triggering Event” in the original note documents and the Allonge documents to include any exchanges on which our common stock may be listed or quoted for trading. The parties also (i) amended how the fair market value of our common stock, on the date of exercise, would be defined in a formula used to calculate the net number of shares that Stockbridge would receive upon a cashless exercise, (ii) extended the maturity date of the Convertible Note to October 1, 2015, (iii) revised the terms of Warrant 1-5 to apply the conversion rate from the Earth911 to the number of shares of our common stock underlying Warrant 1-5 and the exercise price at which such shares would be issued upon the exercise date, and (iv) amended the exercisable dates of the contingent Warrant 1-2, the contingent Warrant 1-3, and the contingent Warrant 1-4 to be exercisable 42 months, 45 months, and 48 months, respectively, following the issuance date of the contingent warrants. Finally, Stockbridge retroactively agreed to waive its right to effect a partial conversion of the Convertible Note, with such waiver to be effective for a period of 12 months from October 17, 2012.

To effect the changes in the Second Allonge, we issued to Stockbridge an additional warrant to purchase 500,000 shares of our common stock (“Warrant 1-6”). Warrant 1-6 was exercisable at or after the date of the Second Allonge, and was in the same form as Warrant 1-5, as amended by the Second Allonge. Warrant 1-6 would expire five years from the date of issuance.

See Note 9 for a discussion of the Convertible Note and of the exercise of the related exercisable warrants in March 2013.

Acquisition of the Quest Interests – On July 16, 2013, we acquired all of the Quest Interests held by QRG, comprising 50% of the membership interests of Quest. The purchase price for the Quest Interests consisted of 22,000,000 shares of our common stock issued at a fair market value of $2.50 per share based on the closing price of the stock on the date of the transaction and the Sellers Notes as described in Note 10 in the aggregate principal amount of $22,000,000. The total purchase price of $77,000,000 was paid to the owners of QRG who at the time of the transaction were related parties: the Chief Executive Officer of Quest and the President of Quest. After the close of the transaction, the Chief Executive Officer of Quest became the President, Chief Executive Officer and member of the Board of Directors of our company. Unpaid interest related to the Sellers Notes at March 31, 2014 and December 31, 2013 is $130,795 and $132,878, respectively.

 

The Securities Purchase Agreement provides that QRG and its members may not engage or take a financial interest in any Competitive Business within the Restricted Territory (each as defined in the Securities Purchase Agreement) for a period of five years. The Securities Purchase Agreement also provides restrictions with respect to customers of Quest and non-solicitation of employees of Quest for a period of five years. The Securities Purchase Agreement further provides that if there is an event of default on the Sellers Notes, QRG and its members may compete with us and solicit customers, provided that they resign from all positions held with us first.

Subsequent Events
Subsequent Events

15. Subsequent Events

Stock and Warrants Issued

On April 18, 2014, we issued an aggregate of 1,192,500 units, or the Units, to several accredited investors, for an aggregate purchase price of $2,385,000, with each Unit consisting of one share of our common stock and a warrant to purchase one share of our common stock for $2.00 per share. Each warrant may be exercised by the holder thereof, in such holder’s sole discretion, in whole or in part, any time prior to April 1, 2017.

Line of Credit—Regions

On May 9, 2014, Quest entered into a Sixth Amendment to the Loan Agreement with Regions Bank. The Loan Agreement was amended to, among other things, (i) add a $5.0 million accordion feature, (ii) increase the Borrowing Base, (iii) reduce the Applicable Margin for Eurodollar Rate Loans by 1% per annum, (iv) add an unused fee of 0.25% per annum, (v) extend the maturity date to May 31, 2015, (vi) release the Guaranty of our Chief Executive Officer previously executed in favor of the Lender, (vii) add our company and our wholly owned subsidiary, Earth911, Inc., as Guarantors, (viii) allow for Permitted Acquisitions, and (ix) delete two of the financial covenants and modify the other financial covenants in certain respects.

In connection with the Sixth Amendment, on May 9, 2014, we and Earth911entered into a Guaranty (the “Guaranty”) for the benefit of Regions to guarantee the obligations of Quest under the Loan Agreement and other Loan Documents. In addition, on May 9, 2014, Earth911 entered into a Pledge Agreement with Regions, pursuant to which Earth911 pledged to Regions 50% of the membership interests in Quest held by Earth911 to secure the prompt and complete payment and performance of the obligations of Quest and the Guarantors under the Loan Agreement and other Loan Documents.

Summary of Significant Accounting Policies (Policies)

Principals of Presentation, Consolidation, and Reclassifications

The consolidated financial statements included herein have been prepared by us without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited financial statements for the year ended December 31, 2013. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted, as permitted by the SEC, although we believe the disclosures that are made are adequate to make the information presented herein not misleading.

The accompanying consolidated financial statements reflect, in our opinion, all normal recurring adjustments necessary to present fairly our financial position at March 31, 2014, and the results of our operations and cash flows for the periods presented. We derived the December 31, 2013 consolidated balance sheet data from audited financial statements, but did not include all disclosures required by GAAP.

 

Through July 16, 2013, Quest was deemed to be a separate operating unit and as such, there were no intercompany transactions that required elimination at that time. All other intercompany accounts and transactions have been eliminated in consolidation, including transactions between QRHC and Quest subsequent to July 16, 2013. Certain reclassifications have been made to prior year balances to conform to the current year presentation. Interim results are subject to seasonal variations, and the results of operations for the three months ended March 31, 2014 are not necessarily indicative of the results to be expected for the full year.

As Quest, Earth911, and YouChange are operating as ecology based green service companies, we did not deem segment reporting necessary.

Accounting Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could materially differ from those estimates.

We use significant estimates when accounting for the collectability of accounts receivable, depreciable lives of fixed assets, accruals, assumptions used in the valuation and recognition of share-based payments and warrant liability, the realization of goodwill and intangible assets, deferred tax assets, the equity method investment in Quest, and the application of accounting for the senior secured convertible notes, all of which are discussed in their respective notes to the consolidated financial statements.

Revenue Recognition

We recognize revenue only when all of the following criteria have been met:

 

    persuasive evidence of an arrangement exists;

 

    delivery has occurred or services have been rendered;

 

    the fee for the arrangement is fixed or determinable; and

 

    collectability is reasonably assured.

Persuasive Evidence of an Arrangement – We document all terms of an arrangement in a quote signed or confirmed by the customer prior to recognizing revenue.

Delivery Has Occurred or Services Have Been Performed – We perform all services or deliver all products prior to recognizing revenue. Services are deemed to be performed when the services are complete.

The Fee for the Arrangement is Fixed or Determinable – Prior to recognizing revenue, a customer’s fee is either fixed or determinable under the terms of the quote or accepted customer purchase order.

Collectability Is Reasonably Assured – We assess collectability on a customer by customer basis based on criteria outlined by management.

Quest provides businesses with management programs to reuse, recycle, and dispose of a wide variety of waste streams and recyclables generated by their business. Quest utilizes third-party subcontractors to execute the collection, transport, and recycling or disposal of used motor oil, oil filters, scrap tires, cooking oil, and expired food products. We evaluate the criteria outlined in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 605-45, Revenue Recognition—Principal Agent Considerations, in determining whether it is appropriate to record the gross amount of service revenue and related costs or the net amount earned as management fees. Generally, when we are primarily obligated in a transaction, have latitude in establishing prices and selecting suppliers, have credit risk, or have several but not all of these indicators, we record revenue gross and record amounts collected from customers for sales tax on a net basis. In a situation where we are not primarily obligated and amounts earned are determined using a fixed percentage, a fixed-payment schedule, or a combination of the two, we would record the net amounts as management fees earned. Currently, we have no contracts accounted for as management fees.

 

Earth911 revenue primarily represents licensing fees that are recognized ratably over the term of the license. We derive some revenue from advertising contracts, which we recognize ratably, over the term that the advertisement appears on our website.

Cash and Cash Equivalents

We consider all highly liquid instruments with a remaining maturity of three months or less when purchased to be cash equivalents.

Fair Value Measurements

ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820 also specifies a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value as follows:

Level 1: Quoted prices in active markets for identical assets or liabilities;

Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

Level 3: Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our own estimate of assumptions that market participants would use in pricing the asset or liability.

Fair value accounting has been applied to the valuation of stock-based compensation, warrants issued, intangible assets, and goodwill.

Stock Options We estimate the fair value of stock options on the grant date in accordance with ASC Topic 718 using the Black-Scholes-Merton valuation model. Significant Level 3 assumptions used in the calculation are as follows:

 

    We determine the expected term using the simplified method for plain vanilla options by averaging the contractual term and vesting period of the award due to the unavailability of appropriate statistical data required to properly estimate the expected term in accordance with SEC Staff Accounting Bulletin No. 107;

 

    We measure expected volatility using the historical changes in the market price of our common stock, disregarding identifiable periods of extraordinarily volatile share prices due to certain events that are not expected to recur during the expected term;

 

    We use the risk-free interest rate to approximate the implied yield on zero-coupon U.S. Treasury bonds with a remaining maturity equal to the expected term of the awards; and

 

    We base forfeitures on the history of cancellations of options granted by us and our analysis of potential future forfeitures.

Net Loss Per Share

We compute basic net loss per share by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. The calculation of basic loss per share gives retroactive effect to the recapitalization related to our reverse acquisition of Earth911. We have other potentially anti-dilutive securities outstanding that are not shown in a diluted net loss per share calculation because their effect in both 2014 and 2013 would be dilutive. These potentially dilutive securities include options, warrants, and convertible promissory notes totaled 15,096,948 and 11,782,240 shares at March 31, 2014 and 2013, respectively.

Investment in Quest

Investee companies that are not consolidated, but over which we exercise significant influence, are accounted for under the equity method of accounting. Whether or not we exercise significant influence with respect to an investee depends on an evaluation of several factors, including, among others, representation on the investee company’s board of directors and ownership level, which is generally a 20% to 50% interest in the voting securities of the investee company. Prior to July 17, 2013, we accounted for the investment in Quest under the equity method of accounting, in which the investee company’s accounts were not consolidated within our consolidated balance sheet and statement of operations. We reflect our share of earnings or losses of the investee company in the caption “Equity in Quest Resource Management Group, LLC income” in our consolidated statement of operations. Subsequent to our acquisition of the Quest Interests, we consolidate the operational activity of Quest with QRHC.

Income Taxes

We recognize deferred tax assets and liabilities for the future tax consequences of temporary differences between the book and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. We establish valuation allowances to reduce a deferred tax asset to the amount expected to be realized. We assess our ability to realize deferred tax assets based on current earnings performance and on projections of future taxable income in the relevant tax jurisdictions. These projections do not include taxable income from the reversal of deferred tax liabilities and do not reflect a general growth assumption but do consider known or pending events, such as the passage of legislation. We review our estimates of future taxable income annually. We first analyze all tax positions to determine if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of any related appeals or litigation processes. After the initial analysis, we measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. Our income tax returns are subject to adjustment under audit for approximately the last three years.

If we are required to pay interest on the underpayment of income taxes, we recognize interest expense in the first period the interest becomes due according to the provisions of the relevant tax law.

If we are subject to payment of penalties, we recognize an expense for the amount of the statutory penalty in the period when we take the position on the income tax return. If we did not recognize the penalty in the period when we initially took the position, we recognize the expense in the period when we change our judgment about meeting minimum statutory thresholds related to the initial position taken.

Stock-Based Compensation

We expense all share-based grants to employees, including grants of employee stock options, based on their estimated fair values at grant date, in accordance with ASC Topic 718. We record compensation expense for stock options over the vesting period using the estimated fair value on the date of grant, as calculated using the Black-Scholes-Merton model. We classify all share-based awards as equity instruments and recognize the vesting of the awards ratably over their respective terms. See Note 13 for a description of our share-based compensation plan and information related to awards granted under the plan.

The Company and Description of Business and Future Liquidity Needs (Tables)
Summarized Pro Forma Consolidated Operating Results

The following table summarizes our pro forma consolidated operating results for the three months ended March 31, 2013, assuming Quest had been a wholly owned subsidiary and 100% of Quest’s operations were included in the relevant periods:

 

     Pro Forma
Three Months Ended March 31,
2013
 
     (Unaudited)  

Consolidated operating statement information:

  

Net sales

   $ 30,964,553   

Gross profit

     3,571,150   

Income (loss) from operations

     (924,938

Net income (loss)

     (2,821,808
Summary of Significant Accounting Policies (Tables)

The following table sets forth the computation of basic and diluted loss per share:

 

     For the Three Months Ended March 31,  
     2014     2013  
     (Unaudited)     (Unaudited)  

Net loss applicable to common stockholders—numerator for basic and diluted earnings per share

   $ (1,488,423   $ (3,297,604
  

 

 

   

 

 

 

Weighted—average common shares outstanding—denominator for basic and diluted earnings per share

     95,821,525        57,961,106   

Net loss per share:

    
  

 

 

   

 

 

 

Basic and diluted

   $ (0.02   $ (0.06
  

 

 

   

 

 

 

The following table sets forth the anti-dilutive securities excluded from diluted loss per share:

 

     As of March 31,  
     2014      2013  
     (Unaudited)      (Unaudited)  

Anti-dilutive securities excluded from diluted loss per share:

     

Stock options

     4,096,948         3,432,115   

Warrants

     —          1,381,113   

Convertible notes

     11,000,000         6,969,012   
  

 

 

    

 

 

 
     15,096,948         11,782,240   
  

 

 

    

 

 

Property and Equipment (Tables)
Components of Property and Equipment

At March 31, 2014 and December 31, 2013, property and equipment consisted of the following:

 

     March 31,     December 31,  
     2014     2013  
     (Unaudited)        

Vehicles

   $ 544,984      $ 544,984   

Computer equipment

     796,419        790,987   

Office furniture and fixtures

     240,929        239,662   

Machinery and equipment

     458,257        458,257   

Leasehold improvements

     12,363        12,363   
  

 

 

   

 

 

 
     2,052,952        2,046,253   

Less: accumulated depreciation

     (1,470,335     (1,400,768
  

 

 

   

 

 

 
   $ 582,617      $ 645,485   
  

 

 

   

 

 

Intangible Assets (Tables)
Schedule of Intangible Assets

The components of intangible assets are as follows:

 

March 31, 2014    Estimated
Useful Life
     Gross Carrying
Amount
     Accumulated
Amortization
     Net  

Finite lived intangible assets:

           

Customer relationships

     5 years       $ 12,720,000       $ 1,802,000       $ 10,918,000   

Trademarks

     7 years         6,230,000         630,417         5,599,583   

Patents

     7 years         230,683         225,191         5,492   

Software

     7 years         77,425         —          77,425   

Customer lists

     5 years         307,153         75,361         231,792   
     

 

 

    

 

 

    

 

 

 

Total intangible assets

      $ 19,565,261       $ 2,732,969       $ 16,832,292   
     

 

 

    

 

 

    

 

 

 

Goodwill

     Indefinite       $ 58,337,290          $ 58,337,290   
Accrued Expenses and Other Current Liabilities (Tables)
Summary of Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:

 

     March 31,      December 31,  
     2014      2013  
     (Unaudited)         

Compensation

   $ 796,663       $ 1,114,252   

Deferred rent obligation

     835,804         930,274   

Sales and use tax

     183,801         484,134   

Professional fees

     144,826         40,241   

Insurance

     —           48,663   

Accrued interest and other

     81,739         56,206   
  

 

 

    

 

 

 
   $ 2,042,833       $ 2,673,770   
  

 

 

    

 

 

 

Convertible Note Payable (Tables)
Summary of Convertible Notes Payable Outstanding

The following convertible note payable was outstanding as of March 31, 2014 and December 31, 2013:

 

     March 31,      December 31,  
     2014      2013  
     (Unaudited)         

Convertible note payable to unrelated parties, issuance date of September 2012

     —        $ 25,000   
  

 

 

    

 

 

 

Total convertible notes payable - short term

     —        $ 25,000   
  

 

 

    

 

 

 

Long-Term Debt and Capital Lease Obligations (Tables)
Summary of Long-Term Debt

At March 31, 2014 and December 31, 2013, total long-term debt outstanding consisted of the following:

 

     March 31,     December 31,  
     2014     2013  
     (Unaudited)        

Secured convertible notes payable to related parties, 7% interest due monthly in arrears, due July 2016, repayment provisions discussed further below (Net of discount of $4,205,292 and $4,656,934 as of March 31, 2014 and December 31, 2013, respectively)

   $ 17,794,708      $ 17,343,066  

Capital lease obligations, imputed interest at 4.75%, with monthly payments of $1,507 through November 2016, secured by computer equipment

     45,211        49,163   
  

 

 

   

 

 

 

Total

     17,839,919        17,392,229   

Less: current maturities

     (16,224     (16,096
  

 

 

   

 

 

 

Long-term portion

   $ 17,823,695      $ 17,376,133   
  

 

 

   

 

 

 

Investment in Quest Resource Management Group, LLC (Tables)

the following total purchase price for Quest as follows:

 

Consideration paid for Quest Interest

   $ 77,000,000   

Non-controlling interest in the acquiree at the acquisition date fair value

     27,050,000   
  

 

 

 

Total consideration

   $ 104,050,000   
  

 

 

The purchase price allocation as of July 16, 2013 for the assets, liabilities, intangibles, and goodwill totaling $104,050,000 was as follows:

 

Net assets and liabilities

   $ 1,214,804   

Customer relationships

     12,720,000   

Trademarks

     6,230,000   

Goodwill

     83,885,196   
  

 

 

 
   $ 104,050,000   
  

 

 

 

The financial condition and operating results of Quest for the relevant periods are presented below:

 

     Three Months ended March 31,  
     2014     2013  
     (Unaudited)     (Unaudited)  

Condensed operating statement information:

    

Net sales

   $ 37,972,639      $ 30,651,064   

Gross profit

     3,145,004        3,297,354   

Income from operations

     21,583        1,075,048   

Net income (loss)

     (22,065     951,592   
Income Taxes (Tables)

The components of net deferred taxes are as follows:

 

     March 31,
2014
    December 31,
2013
 
     (Unaudited)        

Deferred tax assets (liabilities):

    

Net operating loss

   $ 4,469,000      $ 4,212,000   

Stock-based compensation

     2,168,000        2,103,000   

Accrued interest expense

     202,000        150,000   

Allowance for doubtful accounts

     64,000        47,000   

Deferred lease liability

     88,000        70,000   
  

 

 

   

 

 

 

Total deferred tax assets

     6,991,000        6,582,000   

Less: valuation allowance

     (6,991,000     (6,582,000
  

 

 

   

 

 

 

Net deferred taxes

   $ —       $ —    
  

 

 

   

 

 

 

The reconciliation between the income tax expense (benefit) calculated by applying statutory rates to net loss and the income tax benefit reported in the accompanying consolidated financial statements is as follows:

 

     March 31,     December 31,  
     2014     2013  
     (Unaudited)        

U.S. federal statutory rate applied to pretax income

   $ (506,064   $ (6,051,780

Permanent differences

     153,558        2,739,048   

State taxes and other

     (56,494     1,597,415   

Change in valuation allowance

     409,000        1,715,317   
  

 

 

   

 

 

 
   $ —       $ —    
  

 

 

   

 

 

 
Stockholders' Equity (Tables)

During the three months ended March 31, 2014, we issued shares of common stock as follows:

 

     Common Stock         
     Shares      Amount  

Note and interest conversions

     23,201       $ 29,001   
  

 

 

    

 

 

 
     23,201       $ 29,001   
  

 

 

    

 

 

 

Following is a summary of stock option activity subsequent to December 31, 2013 through March 31, 2014:

 

 

     Stock Options  
                  Weighted-  
           Exercise      Average  
     Number     Price Per      Exercise Price  
     of Shares     Share      Per Share  

Outstanding at December 31, 2013

     4,141,948      $ 2.00 - 3.25       $ 2.48   

Granted

     —          —          —    

Canceled/Forfeited

     (45,000   $ 2.05 - 2.05       $ 2.05   
  

 

 

      

Outstanding at March 31, 2014

     4,096,948      $ 2.00 - 3.25       $ 2.48   
  

 

 

      

The following additional information applies to options outstanding at March 31, 2014:

 

          Weighted-                    
          Average     Weighted-           Weighted-  
Ranges of   Outstanding at     Remaining     Average     Exercisable at     Average  
Exercise   March 31,     Contractual     Exercise     March 31,     Exercise  

Prices

  2014     Life     Price     2014     Price  
$2.00 - $3.25     4,096,948        8.2      $ 2.48        3,199,448      $ 2.63   

The Company and Description of Business and Future Liquidity Needs - Additional Information (Detail)
0 Months Ended 3 Months Ended
Jul. 16, 2013
Mar. 31, 2014
Dec. 31, 2013
Oct. 28, 2013
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
 
 
 
 
Entity name changing effective date
 
Oct. 28, 2013 
 
 
Increased common stock shares authorized
 
200,000,000 
200,000,000 
200,000,000 
Percentage of ownership interest acquired
50.00% 
 
 
 
Percentage of ownership interest held by company
100.00% 
 
 
 
Quest Resource Management Group, LLC [Member]
 
 
 
 
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
 
 
 
 
Percentage of remaining ownership interest
50.00% 
 
 
 
The Company and Description of Business and Future Liquidity Needs - Summarized Pro Forma Consolidated Operating Results (Detail) (USD $)
3 Months Ended
Mar. 31, 2014
Mar. 31, 2013
Schedule Of Condensed Consolidating Statement Of Operations [Line Items]
 
 
Net sales
$ 38,160,050 
$ 313,489 
Gross profit
3,332,415 
273,796 
Income (loss) from operations
(612,956)
(1,999,986)
Net income (loss)
(1,488,423)
(3,297,604)
Quest Resource Management Group, LLC [Member]
 
 
Schedule Of Condensed Consolidating Statement Of Operations [Line Items]
 
 
Net sales
37,972,639 
30,651,064 
Gross profit
3,145,004 
3,297,354 
Income (loss) from operations
21,583 
1,075,048 
Net income (loss)
(22,065)
951,592 
Pro Forma [Member] |
Quest Resource Management Group, LLC [Member]
 
 
Schedule Of Condensed Consolidating Statement Of Operations [Line Items]
 
 
Net sales
 
30,964,553 
Gross profit
 
3,571,150 
Income (loss) from operations
 
(924,938)
Net income (loss)
 
$ (2,821,808)
Summary of Significant Accounting Policies - Additional Information (Detail)
3 Months Ended
Mar. 31, 2014
Mar. 31, 2013
Significant Accounting Policies [Line Items]
 
 
Potentially dilutive securities include options, warrants, and convertible promissory notes
15,096,948 
11,782,240 
Tax benefit percentage of being realized upon ultimate settlement
50.00% 
 
Minimum [Member]
 
 
Significant Accounting Policies [Line Items]
 
 
Percentage of voting right
20.00% 
 
Maximum [Member]
 
 
Significant Accounting Policies [Line Items]
 
 
Percentage of voting right
50.00% 
 
Summary of Significant Accounting Policies - Schedule of Computation of Basic and Diluted Earnings Per Share (Detail) (USD $)
3 Months Ended
Mar. 31, 2014
Mar. 31, 2013
Earnings Per Share [Abstract]
 
 
Net loss applicable to common stockholders-numerator for basic and diluted earnings per share
$ (1,488,423)
$ (3,297,604)
Weighted-average common shares outstanding-denominator for basic and diluted earnings per share
95,821,525 
57,961,106 
Basic and diluted
$ (0.02)
$ (0.06)
Summary of Significant Accounting Policies - Schedule of Anti-dilutive Securities Excluded from Diluted Loss Per Share (Detail)
3 Months Ended
Mar. 31, 2014
Mar. 31, 2013
Dilutive Securities Included And Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
 
 
Anti-dilutive securities excluded from diluted earnings per share
15,096,948 
11,782,240 
Stock options [Member]
 
 
Dilutive Securities Included And Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
 
 
Anti-dilutive securities excluded from diluted earnings per share
4,096,948 
3,432,115 
Warrants [Member]
 
 
Dilutive Securities Included And Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
 
 
Anti-dilutive securities excluded from diluted earnings per share
   
1,381,113 
Convertible notes [Member]
 
 
Dilutive Securities Included And Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
 
 
Anti-dilutive securities excluded from diluted earnings per share
11,000,000 
6,969,012 
Inventories - Additional Information (Detail) (USD $)
Mar. 31, 2014
Dec. 31, 2013
Inventory Disclosure [Abstract]
 
 
Finished goods inventory
$ 7,584 
$ 3,251 
Reserve for inventory obsolescence of consumer electronics and computer devices
$ 0 
$ 0 
Property and Equipment - Components of Property and Equipment (Detail) (USD $)
Mar. 31, 2014
Dec. 31, 2013
Property, Plant and Equipment [Line Items]
 
 
Property plant and equipment Gross
$ 2,052,952 
$ 2,046,253 
Less: accumulated depreciation
(1,470,335)
(1,400,768)
Property plant and equipment Net
582,617 
645,485 
Vehicles [Member]
 
 
Property, Plant and Equipment [Line Items]
 
 
Property plant and equipment Gross
544,984 
544,984 
Computer equipment [Member]
 
 
Property, Plant and Equipment [Line Items]
 
 
Property plant and equipment Gross
796,419 
790,987 
Office furniture and fixtures [Member]
 
 
Property, Plant and Equipment [Line Items]
 
 
Property plant and equipment Gross
240,929 
239,662 
Machinery and equipment [Member]
 
 
Property, Plant and Equipment [Line Items]
 
 
Property plant and equipment Gross
458,257 
458,257 
Leasehold improvements [Member]
 
 
Property, Plant and Equipment [Line Items]
 
 
Property plant and equipment Gross
$ 12,363 
$ 12,363 
Property and Equipment - Additional Information (Detail) (USD $)
Mar. 31, 2014
Dec. 31, 2013
Property, Plant and Equipment [Line Items]
 
 
Accumulated depreciation of leased equipment
$ 3,365 
$ 1,402 
Office furniture and equipment [Member]
 
 
Property, Plant and Equipment [Line Items]
 
 
Capital leases is included in the financial Statements
$ 50,470 
$ 49,163 
Intangible Assets - Schedule of Intangible Assets (Detail) (USD $)
3 Months Ended
Mar. 31, 2014
Dec. 31, 2013
Finite-Lived Intangible Assets [Line Items]
 
 
Gross Carrying Amount
$ 19,565,261 
 
Accumulated Amortization
2,732,969 
 
Net
16,832,292 
 
Goodwill Useful Life Description
Indefinite 
 
Goodwill Gross Carrying Amount
58,337,290 
 
Goodwill Net
58,337,290 
58,337,290 
Customer relationships [Member]
 
 
Finite-Lived Intangible Assets [Line Items]
 
 
Estimated Useful Life
5 years 
 
Gross Carrying Amount
12,720,000 
 
Accumulated Amortization
1,802,000 
 
Net
10,918,000 
 
Trademarks [Member]
 
 
Finite-Lived Intangible Assets [Line Items]
 
 
Estimated Useful Life
7 years 
 
Gross Carrying Amount
6,230,000 
 
Accumulated Amortization
630,417 
 
Net
5,599,583 
 
Patents [Member]
 
 
Finite-Lived Intangible Assets [Line Items]
 
 
Estimated Useful Life
7 years 
 
Gross Carrying Amount
230,683 
 
Accumulated Amortization
225,191 
 
Net
5,492 
 
Software [Member]
 
 
Finite-Lived Intangible Assets [Line Items]
 
 
Estimated Useful Life
7 years 
 
Gross Carrying Amount
77,425 
 
Accumulated Amortization
   
 
Net
77,425 
 
Customer lists [Member]
 
 
Finite-Lived Intangible Assets [Line Items]
 
 
Estimated Useful Life
5 years 
 
Gross Carrying Amount
307,153 
 
Accumulated Amortization
75,361 
 
Net
$ 231,792 
 
Intangible Assets - Additional Information (Detail) (USD $)
3 Months Ended
Mar. 31, 2014
Mar. 31, 2013
Goodwill And Intangible Assets Disclosure [Abstract]
 
 
Amortization expense relates to intangible assets
$ 882,096 
$ 0 
Indefinite-lived intangible assets other than goodwill
$ 0 
$ 0 
Accrued Expenses and Other Current Liabilities - Summary of Accrued Expenses and Other Current Liabilities (Detail) (USD $)
Mar. 31, 2014
Dec. 31, 2013
Payables And Accruals [Abstract]
 
 
Compensation
$ 796,663 
$ 1,114,252 
Deferred rent obligation
835,804 
930,274 
Sales and use tax
183,801 
484,134 
Professional fees
144,826 
40,241 
Insurance
   
48,663 
Accrued interest and other
81,739 
56,206 
Accrued Liabilities, Total
$ 2,042,833 
$ 2,673,770 
Line of Credit - Additional Information (Detail) (Revolving Credit Facility [Member], USD $)
3 Months Ended
Mar. 31, 2014
Line of Credit Facility [Line Items]
 
Line of credit facility agreement date
Dec. 15, 2010 
Working capital from loan agreement with Regions Bank
$ 10,000,000 
Interest on outstanding principal amount
4.75% 
Outstanding principal amount on line of credit facility
4,750,000 
Amount available to be borrow under line of credit facility
$ 5,250,000 
Interest rate line of credit facility description
The base rate for any day is the greater of (a) the Federal funds rate plus one-half of 1%, (b) Region's published effective prime rate, or (c) the Eurodollar rate for such day based on an interest period of one month. 
Line of credit facility expiration date
May 31, 2015 
Base Rate [Member]
 
Line of Credit Facility [Line Items]
 
Fluctuating interest rate based on base rate
1.50% 
Eligible Accounts Receivable [Member] |
Largest Customer [Member]
 
Line of Credit Facility [Line Items]
 
Percentage of accounts receivable form Quest's customers
60.00% 
Eligible Accounts Receivable [Member] |
Other Customer [Member]
 
Line of Credit Facility [Line Items]
 
Percentage of accounts receivable form Quest's customers
85.00% 
Convertible Note Payable - Additional Information (Detail) (USD $)
3 Months Ended 3 Months Ended 1 Months Ended
Mar. 31, 2014
Dec. 31, 2013
Mar. 29, 2013
Mar. 31, 2014
Convertible Notes Payable [Member]
Sep. 30, 2012
Convertible note payable to unrelated parties, issuance date of September 2012 [Member]
Notes Payable [Line Items]
 
 
 
 
 
Debt instrument principal amount
 
 
 
$ 25,000 
 
Debt instrument interest amount
 
 
 
4,001 
 
Number of shares converted in to common stock
 
 
 
23,201 
 
Convertible notes issued during the period
 
 
 
 
25,000 
Debt instrument maturity date extended
 
 
 
 
30 days 
Debt instrument interest rate
 
 
 
 
10.00% 
Common Stock value per share
$ 0.001 
$ 0.001 
$ 3.00 
 
$ 1.25 
Debt instrument beneficial conversion feature amount
$ 5,500,000 
 
 
 
$ 17,500 
Convertible Note Payable - Summary of Convertible Note Payable Outstanding (Detail) (USD $)
Mar. 31, 2014
Dec. 31, 2013
Notes Payable [Line Items]
 
 
Total convertible notes payable-short term
    
$ 25,000 
Convertible note payable to unrelated parties, issuance date of September 2012 [Member]
 
 
Notes Payable [Line Items]
 
 
Total convertible notes payable-short term
    
$ 25,000 
Long-Term Debt and Capital Lease Obligations - Summary of Long-Term Debt (Detail) (USD $)
Mar. 31, 2014
Dec. 31, 2013
Long Term Debt And Equity Financings [Line Items]
 
 
Debt and Capital lease obligation, Total
$ 17,839,919 
$ 17,392,229 
Less: current maturities
(16,224)
(16,096)
Long-term portion
17,823,695 
17,376,133 
Capital lease obligations, imputed interest at 4.75% [Member]
 
 
Long Term Debt And Equity Financings [Line Items]
 
 
Capital lease obligations, imputed interest at 4.75%, with monthly payments of $1,507 through November 2016, secured by computer equipment
45,211 
49,163 
7% Secured Notes Due 2016 [Member]
 
 
Long Term Debt And Equity Financings [Line Items]
 
 
Secured convertible notes payable to related parties
$ 17,794,708 
$ 17,343,066 
Long-Term Debt and Capital Lease Obligations - Summary of Long-Term Debt (Parenthetical) (Detail) (USD $)
3 Months Ended 12 Months Ended
Mar. 31, 2014
Dec. 31, 2013
Capital lease obligations, imputed interest at 4.75% [Member]
 
 
Long Term Debt And Equity Financings [Line Items]
 
 
Imputed interest rate for capital lease obligation
4.75% 
4.75% 
Monthly installment capital lease obligation
$ 1,507 
$ 1,507 
7% Secured Notes Due 2016 [Member]
 
 
Long Term Debt And Equity Financings [Line Items]
 
 
Interest rate on convertible notes
7.00% 
7.00% 
Debt instrument, maturity date
July 2016 
 
Debt instrument, net of discount
$ 4,205,292 
$ 4,656,934 
Long-Term Debt and Capital Lease Obligations - Additional Information (Detail) (USD $)
0 Months Ended 3 Months Ended 3 Months Ended 0 Months Ended 3 Months Ended 3 Months Ended 3 Months Ended 3 Months Ended 3 Months Ended
Mar. 29, 2013
Mar. 31, 2014
Mar. 31, 2013
Dec. 31, 2013
Mar. 31, 2012
Warrant
Mar. 31, 2014
Convertible Notes Payable [Member]
Mar. 31, 2014
Convertible Secured Promissory Notes [Member]
Jul. 16, 2013
Convertible Secured Promissory Notes [Member]
Jul. 16, 2013
Convertible Secured Promissory Notes [Member]
Chief Executive Officer [Member]
Jul. 16, 2013
Convertible Secured Promissory Notes [Member]
President of Quest [Member]
Jul. 16, 2013
Stockbridge Senior Secured Convertible Note [Member]
Mar. 22, 2012
Stockbridge Senior Secured Convertible Note [Member]
Debt_Instruments
Mar. 29, 2013
Stockbridge Enterprises, LP [Member]
Jul. 16, 2013
Stockbridge Enterprises, LP [Member]
Oct. 31, 2012
Stockbridge Enterprises, LP [Member]
Mar. 31, 2014
Stockbridge Enterprises, LP [Member]
Convertible Notes Payable [Member]
Mar. 31, 2014
Stockbridge Enterprises, LP [Member]
Amendment [Member]
Mar. 31, 2014
Stockbridge Enterprises, LP [Member]
Amendment [Member]
Convertible Notes Payable [Member]
Mar. 31, 2014
Before Maturity Period [Member]
Oct. 31, 2012
Before Maturity Period [Member]
Mar. 31, 2012
Maximum [Member]
42 Month Warrant [Member]
Mar. 31, 2012
Maximum [Member]
45 Month Warrant [Member]
Mar. 31, 2012
Maximum [Member]
48 Month Warrant [Member]
Mar. 31, 2013
Warrant 1-1 [Member]
Mar. 31, 2012
Warrant 1-1 [Member]
Maximum [Member]
Mar. 31, 2013
Warrant 1-5 [Member]
Oct. 31, 2012
Warrant 1-5 [Member]
Maximum [Member]
Mar. 31, 2013
Warrant 1-6 [Member]
Mar. 29, 2013
Warrant 1-6 [Member]
Mar. 31, 2013
Warrant 1-6 [Member]
Maximum [Member]
Mar. 31, 2014
Warrant 1-2 [Member]
Mar. 31, 2014
Warrant 1-3 [Member]
Mar. 31, 2014
Warrant 1-4 [Member]
Mar. 31, 2014
Warrant [Member]
Long Term Debt Maturity [Line Items]
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Convertible note
 
 
 
 
 
 
 
 
 
 
$ 3,000,000 
 
 
$ 3,000,000 
$ 3,000,000 
 
$ 3,000,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Convertible note accrued interest
 
 
 
 
 
 
 
 
 
 
34,500 
 
 
34,500 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Convertible note converted into common stock
 
 
 
 
 
23,201 
 
 
 
 
8,382,597 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior secured convertible notes issued
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior secured convertible warrants issued
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Convertible note maturity period
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Oct. 01, 2015 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Annual interest rate on convertible note
 
 
 
 
 
 
 
7.00% 
 
 
 
 
 
 
 
9.00% 
 
6.00% 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Conversion price of notes to common stock
 
$ 2.00 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$ 0.362 
$ 0.50 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of trading days for calculating average bid price
 
10 days 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tenure of warrant issued
 
5 years 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Warrant to acquire
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
345,278 
345,278 
690,557 
 
1,381,115 
 
5,524,461 
 
 
500,000 
 
 
 
 
Number of contingent warrants issued
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Warrant exercisable per common share
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$ 0.37 
 
$ 0.37 
 
$ 0.37 
 
 
$ 0.37 
$ 0.37 
$ 0.37 
 
Warrant liability accounted in connection with issuance of convertible note
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
18,742,526 
Warrant liability allocated as discount to convertible note
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,500,000 
Warrant liability expensed as financing cost
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
17,242,526 
Exercisable rights to purchase common stock, shares
6,905,576 
 
 
 
 
 
 
 
 
 
 
 
7,405,576 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
500,000 
 
 
 
 
 
Exercise price of warrants
0.37 
 
 
 
 
 
 
 
 
 
 
 
0.37 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock closing price on date of warrant exercise
 
 
 
 
 
 
 
 
 
 
 
 
$ 3.30 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Percentage of warrant price in excess of closing price of common stock
 
 
 
 
 
 
 
 
 
 
 
 
10.00% 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Closing price of common stock on date of exercise of warrant
 
 
 
 
 
 
 
 
 
 
 
 
$ 3.00 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net number value
21,698,338 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net number of shares
7,232,779 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock issued, per share under cashless exercise option
$ 3.00 
$ 0.001 
 
$ 0.001 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Convertible secured promissory note principle amount payable
 
 
 
 
 
 
 
 
22,000,000 
22,000,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Percentage of Security interest, Secured
 
 
 
 
 
 
 
 
25.00% 
25.00% 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Percentage of ownership by officials before acquisition
 
 
 
 
 
 
 
 
50.00% 
50.00% 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Notes accrue interest payable beginning
 
 
 
 
 
 
Sep. 05, 2013 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Notes accrue interest payable in one installment
 
 
 
 
 
 
Jul. 16, 2013 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Principal amount of each sellers note paid down by first capital rise
 
5,000,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Convertible note beneficial conversion feature
 
5,500,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock conversion adjusted
 
Common stock has traded at four times the $2.00. conversion price, as adjusted for any stock splits, reverse stock splits, or both. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unamortized discount on sellers notes
 
4,205,292 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense on seller notes
 
875,467 
308,414 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization of discount on sellers notes
 
451,642 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Convertible note value in excess of principal, if converted